Bank salaries still growing, but future uncertain

This is the first part of a series presented annually by Crowe Horwath on BankingExchange.com in banking compensation trends.

A new survey of bank executives indicates that employee turnover rates and projected salary increases for bank employees are both at four-year highs. Although there are some signs that these trends are leveling off, the study confirms that the labor market in banking remains very competitive, with average pay raises continuing to grow, even for those employees whose performances fall short of expectations.

Rising employee turnover drives salaries upward

As memories of the recession and recovery strategies begin to recede, and as the banking industry continues adapting to the post-recession regulatory environment, most broad metrics suggest the industry is in the midst of a period of solid, steady growth.

This environment, coupled with low unemployment rates and an expanding economy, has put upward pressure on bank employees’ average salary levels. These general observations are reinforced by specific examples of salary and benefits data collected in the 2017 Crowe Horwath LLP Bank Compensation and Benefits Survey.

Every year, Crowe surveys financial services companies throughout the United States about compensation trends, benefits, incentives, and other human resource issues. The 2017 survey drew responses from 375 banks, representing a cross section of the industry by size and geographic location. The survey results indicate the labor market remains competitive, but there are some signs the upward pressures on salaries might be moderating slightly.

One obvious indicator of the strength of a labor market is employee turnover (Exhibit 1). Employee turnover rates for bank employees – both officers and nonofficers – have been climbing steadily for the past three years. After bottoming out in 2014, turnover rates began climbing, reaching their highest level in more than a decade in 2017.

This multiyear upward trend is an obvious indicator of a labor market that is continuing to grow tighter, as bank employees become less cautious and more willing to seek out new opportunities in a growing economy. This tendency inevitably puts upward pressure on average salaries, as banks compete more aggressively to attract and retain talent.

Notice, however, that the rate of increase slowed significantly from 2016 to 2017. This flattening of the rate of increase would seem to suggest that the coming years might see some easing of the upward pressure on employee salaries.

Comparing expectations with outcomes

The effect that rising employee turnover has on salaries can be seen directly in other parts of the 2017 survey. For example, each year survey respondents are asked to report the average salary increases that their banks awarded to both officers and nonofficer employees. They also are asked to project the average salary increases they expect to see in the coming year. Comparing the actual increases to the prior year’s projections can produce some revealing insights. (Exhibit 2)

The average annual salary increases for both officers and nonofficers have been on a general upward trend since the depths of the recession. However, the 2017 results seem to suggest this trend is moderating. In fact, the actual annual increases in 2017 were actually just slightly lower than the 2016 increases.

While the survey participants underestimated the projected salary increases for both 2016 and 2017, their projections were much closer to the mark in 2017. What’s more, their projections have remained relatively stable for the past three years. This further strengthens the impression that, while the labor market remains competitive, bank executives seem to be sensing the upward pressures on salaries might be moderating somewhat.

It also can be instructive to compare the turnover rates in Exhibit 1 with the salary increases in Exhibit 2.

For example, after employee turnover rates bottomed out in 2014 and then jumped sharply in 2015, the participating banks responded by accelerating actual pay raises from 2015 to 2016, beyond their earlier projections. With the most recent survey showing both turnover rates and projected salary increases remaining at high levels, it appears the industry is expecting a continuation of the current competitive labor environment.

Comparing pay with performance

As the competitive labor market in the banking industry continues to nudge salaries higher, it also has the potential to generate unforeseen – and possibly undesired – consequences. One of these consequences could be a general dilution of the principle of higher pay for better performance.

The 2017 compensation survey shows that, as one might expect, employees who earned above average performance ratings received higher percentage pay increases than those whose performances were rated as average or below average. But even those employees whose performances failed to meet expectations received, on average, pay increases of more than 2 percent in 2017. (Exhibit 3)

During the years 2010-2014, employees whose performances were rated below average consistently received very modest salary increases averaging only 0.7 percent a year. In 2015, however, there was a noticeable shift in the pattern, as pay increases for below average performers nudged upward, while average and above average performers saw their average pay increases drop slightly.

Employees who exceeded expectations still received more generous pay raises than those who merely met expectations or fell short, but the difference shrank considerably.

Since then, the three groups’ pay raises have moved on generally parallel courses, to the point where below average performers’ pay raises topped 2% for the first time in 2017.

When the pattern in Exhibit 3 is compared to the general employee turnover rates in Exhibit 1, there again appears to be some correlation. It is reasonable to conclude, for example, that when employee turnover started to rise in 2015, banks responded by offering larger pay raises as a retention tool, reasoning that replacing even below-average performers would be costly and time consuming.

Promoting bank positives to hold employees

Viewing these patterns in the context of the broader economy, it also seems likely that increased turnover among nonofficer positions is driven in part by the lowering unemployment rate and generally accelerating economy of the past few years. In many markets, banks today find themselves struggling to fill teller or other customer-facing positions because they must compete with retailers who are willing to pay a premium for employees with cashier or other customer-service experience.

In such a situation, offering a higher pay raise—even to a below-average performer—might seem like a valid tactic. What this approach overlooks, however, is the potentially deleterious effects that can occur when high-performing employees see their below-average performing peers receiving nearly equal rewards.

No matter how strongly employees are discouraged from sharing salary information with their coworkers, leaks nevertheless are quite common. Recognizing this, most banks would be advised to widen, rather than narrow, the pay differentials among the various performance levels.

Moreover, if competing with retail employers to fill customer-facing positions is a genuine concern, banks often can do better by emphasizing their own competitive strengths, such as better working conditions and more predictable work schedules, and by enhancing other possible advantages such as improved career opportunities, performance incentives, and better work-life balance.

With the banking industry—and the economy in general—showing signs of continued growth in the near term, banks can expect the competition for talented employees will remain strong. In this environment, the banks that compete most effectively are likely to be those that look beyond pay increases alone, and instead embrace a broad-based strategy that encompasses pay, benefits, incentives, recognition, learning and promotion opportunities, and the overall quality of the work experience.